If you and your spouse are drifting farther apart and you feel the divorce coming soon, you must start preparing now. Not only is this going to be an emotionally difficult process, but it will take a toll on your finances as well. If you are not ready, it could do more damage than necessary. Divorcing will always affect your finances, but it does not need to cause complete devastation.
Have you thought about how the divorce will affect your retirement plans? What about the tax liabilities of certain assets? Keep reading to learn more about avoiding these financial mistakes during divorce.
1. Failing to consider tax liabilities
Your settlement can lead to significant taxes if you are not careful. You must be wary of receiving property that comes with disproportionate capital gains in comparison to what your spouse gets. For example, your spouse may offer property that has equal value but not mention the tax liability. Assets to watch out for include mutual fund accounts and real estate.
2. Improperly calculating a defined benefit pension plan
If you have a pension plan that gives you monthly income when you retire and which your employer pays and controls, you have to take this into account when getting a divorce. You might think this pension plan does not have value today, but it does – and your spouse may have rights to part of it. Your attorney or an actuary may need to determine the present value.
3. Overlooking retirement account rules
Did you know you need a special legal document to divide retirement plans? Whether you have a pension plan or defined contribution plan such as a 401(k), you will need to put a Qualified Domestic Relations Order in place. A QDRO is necessary to transfer funds to the non-employee spouse without tax consequences.
Read more about financial mistakes to avoid during your divorce from a certified financial planner on USA Today.